By Chris Chase
Cars have never been cheap, but new vehicle prices are a particularly touchy subject in Canada at the moment, as the Loonie continues its upward climb towards parity with the U.S. dollar.
The problem isn’t that vehicles have gotten more expensive in Canada; it’s that the strong Canadian dollar means they now appear much less expensive in the United States. For as long as many Canadians can remember, prices for many products have been higher here – a reflection of our historically weaker currency. But these days, those higher prices look like a rip-off to many Canadian consumers – at least, so say the numerous e-mails Autos has received from readers asking why Canadian new vehicle prices haven’t moved closer to parity with those in the U.S.
But do the higher Canadian prices mean we’re really paying more for cars here than in the United States? The answer, it seems, depends on who you ask, what kind of car you’re buying and how you intend to pay for it.
“In Canada, consumers have access to more incentives than in the U.S., and the result is that in the end, many cars can wind up being less expensive here,” despite sometimes-large differences in MSRPs between the two countries, says Judy Wheeler, Vice-President for Marketing for DaimlerChrysler Canada.
She adds that there are other differences between the Canadian and U.S. markets that affect how prices are set, including the fact that Canadians lease more, on average, than Americans.
Canadian auto industry analyst Dennis Desrosiers agrees, adding that the average Canadian MSRP has gone down slightly in the past year. And on top of the more aggressive incentive programs, he says, Canadians also have more leeway to negotiate a lower price than an American buyer might get.
Philippe St. Pierre of Volkswagen de l’Outaouais, a VW dealer in Gatineau, Quebec, says that finance rates in Canada help offset the differential, and bring down the overall cost of buying a car in Canada.
“In the U.S., the prime lending rate is usually higher than it is here, so financing is often more expensive for American buyers,” he says. “Add to that the fact that many manufacturers will offer Canadian buyers a cash discount as an alternative to a low finance rate (for cash buyers), and the car bought in Canada starts to look more competitive in price.”
And while St. Pierre admits that manufacturers make more money when the Canadian dollar is strong like it is now, it’s simply making back cash that it lost when the dollar was weaker.
“When the Canadian dollar was worth about 70 cents on the U.S. dollar, Volkswagen of Canada did its business based on a Canadian dollar worth about 81 cents,” he said. “At the time, Volkswagen was losing money on the cars it sold in Canada.”
Now, he adds, VW of Canada assumes a Canadian dollar worth about 90 cents. The result is that the company’s Canadian arm is recouping some of the money it lost back then.
“When the Canadian dollar was weaker, some U.S. importers were buying $1 million worth of cars every week,” he said. When the dollar went up, he added, that market dried up overnight.
The variability of exchange rates means that imbalances between prices here and in the U.S. are inevitable, suggests David C. Adams, President of the Association of International Automobile Manufacturers of Canada (AIAMC). “The challenge for a manufacturer,” he says, “is how quickly prices can be adjusted to reflect different exchange rates.”
And that challenge is significant, according to Rob Dexter at BMW Canada, who says that setting vehicle prices here and in the States takes into account many more factors than just the exchange rate. Despite our proximity to the U.S., Dexter says that the Canadian and American markets are very different.
“The costs involved in selling vehicles are very different between the two countries,” he explains. “Every market is a local market, no matter how close it is to another. Our prices are based heavily on our competition within a market.”
Dexter says economies of scale are better in the U.S., where the higher population means more car sales. For BMW, Canada’s smaller population and a single port of entry (Halifax) compared to the States’ multiple ports means higher shipping costs to get cars to their final destinations, he explained. Also, a car sold in Canada will often have different feature content and/or warranty coverage compared to the same model sold in the U.S., he says.
“To react to currency fluctuations even on a monthly level would be very confusing for consumers, dealers and regulators; there has to be some stability,” says Dexter. “But that’s not to say there is no reaction (to varying exchange rates).” He explains that rather than lowering vehicle prices in response to a stronger Canadian dollar, BMW – or any automaker, for that matter – might add content to a given model to add value.
Dennis Desrosiers says drastic price drops will cause many buyers to put off their purchase simply to see how much more the price will drop.
“The industry is very sensitive to price changes,” he says. “Lowering prices affects (resale and) residual values, and will also anger those who bought the same car a week ago at the higher price.”